On 20 May 2023, Australia and the United States announced the Climate, Critical Minerals, and Clean Energy Transformation Compact (Compact). A landmark agreement, the Compact solidifies climate and clean energy as the “third pillar” of the Australia-United States Alliance (alongside defence and economic cooperation). It will bolster Australia’s clean energy transition capabilities, both domestically and internationally.
SO WATT is the Compact?
A compact is an international agreement reflecting the commitment of parties to progress certain goals. The purpose of the Compact is to outline shared objectives to advance ambitious climate goals and clean energy cooperation. To do so, the Compact establishes a forum on Clean Energy Industrial Transformation (Forum), which will “coordinate the implementation of…respective clean energy supply chain strategies”. The Forum is responsible for developing an agreed action plan by the end of 2023, which will be used to progress the following objectives (Objectives):
- Accelerate the expansion and diversification of clean energy supply chains: the parties will collaborate on developing clean energy industrial bases, focusing on solar, wind, storage and hydrogen, and using domestic financial instruments and incentives to attract investors. The Compact will align efforts in the Indo-Pacific, focusing on clean energy manufacturing and exports, especially with developing countries.
- Promote responsible, sustainable supply of critical minerals: the parties will exchange information and collaborate on the supply of critical minerals. The intention is to address market risks and distortions, as well as to explore innovative solutions for responsible mining and processing. The Forum will build upon existing work in existing forums, such as the Minerals Security Partnership, Conference on Critical Materials and Minerals and the Energy Resource Governance Initiative.
- Drive the development of emerging battery technologies: the parties will prioritise technical collaboration and coordination on battery interoperability, standards, regulations, tracing and recyclability to promote offtake agreements in the battery sector.
- Support the development of emerging markets for clean hydrogen and its derivatives: the parties will collaborate to foster clean hydrogen industries, utilising research, incentives and public-private partnerships. This will involve coordinating approaches on hydrogen research, innovation, deployment, markets and supply chains, as well as leveraging leadership roles in multilateral platforms.
How will the Objectives be achieved?
Australia and the United States are forming the ministerial-level Australia-United States Taskforce on Critical Minerals (Taskforce), to enhance cooperation on critical minerals and materials vital for clean energy and defence supply chains. The Taskforce is set to collaborate with industry leaders to ensure “reliable, responsible and secured global access to critical minerals.”
The Compact further sets out the following intentions of Australia and United States in achieving the Objectives:
- Engage critical minerals and clean energy industries;
- Collaborate on projects and standards;
- Promote robust emissions accounting methodologies; and
- Assess clean energy job projections.
SO WATT does this mean for Australia?
One of the most important outcomes of the Compact is the potential for Australia to benefit from the Inflation Reduction Act of 2022 (IRA) and the United States Defense Production Act (DPA).
The IRA, enacted by the Biden Administration in August 2022, is the most significant climate legislation in United States (if not global) history. The IRA turbocharges decarbonisation investment by directing nearly US$400 billion in federal funding to clean energy, an estimated US$216 billion of this amount to be delivered by way of incentives and subsidies programs to accelerate the transition to net zero in the United States. From a domestic perspective, the IRA has been perceived as a threat to Australia’s clean energy sector, because it has lured capital, resources and talent from Australia. See our most recent New Energy Quarterly: Hydrogen – No Longer a Pipe Dream, for further analysis on the existing skilled labour shortage in Australia’s renewable sector.
Promisingly, under the Compact, Australian suppliers may share in the IRA benefits. Under the existing IRA, United States’ developers receive tax credits by sourcing critical minerals from ‘domestic sources’. Pursuant to the Compact, President Biden intends to ask Congress to add Australia as a “domestic source”. While this doesn’t assist Australian developers, if effected, Biden’s proposal will incentivise United States companies to import more Australian critical minerals and renewable energy transition material, thus boosting Australia’s manufacturing capabilities.
SO WATT does the future look like?
The success of the Compact hinges on effective cooperation, technological advancements, and the ability to overcome financial and non-financial barriers to accelerate clean energy development and deployment. Moving forward, it will be crucial to monitor key areas such as the development of clean energy supply chains, collaborations on environmental and labour standards, robust emissions accounting methodologies, and the assessment of clean energy job projections.
While the exact implementation details of the Compact are yet to be finalised, it represents a substantial commercial opportunity for both Australia and the United States. Given the United States’ reliance on imported critical minerals, Australia’s strategic alliance and abundant reserves, coupled with its renewable energy potential, position it as a key player in critical mineral supply and advancement of the global energy transition.
The Hamilton Locke team advises across the energy project life cycle – from project development, grid connection, financing, and construction, including the buying and selling of development and operating projects. For more information, please contact Matt Baumgurtel.
